Supply and Demand

```Supply and Demand
The determinants of supply and
demand

Plot the following
Price
Quantity
\$9
8
2
3
5
9
7
6
What kind of curve is it?
Price
P
Quantity Demanded
Qd
\$9
8
2
3
5
9
7
6
P
9
8
7
6
To be on the
demand curve
a person must
be WILLING
and ABLE to
purchase the
product or service. 2 3
Qd
just a point on the
curve.
D
is the entire
curve.
5
9
Q
Price
P
Quantity Demanded
Qd
\$9
8
2
3
5
9
7
6
There is an
inverse
___________
relationship
between price
and quantity.
P
9
8
7
6
Qd
just a point on the
curve.
D
is the entire
curve.
2 3
5
9
Q
9
8
7
6
Definitions:
D
2 3
5
9
Q
Quantity demanded--it is the amount that will be
purchased at a specific P.
Demand--it is a schedule of quantities of goods and
services that will be purchased at various prices
at a specified time, all other things held constant.
9
8
7
6
Qd
just a point on the
curve.
D
is the entire
curve.
2 3
5
9
Q
Price changes Quantity Demanded
Price does not change demand
The 8 Determinants of Demand

There are 8 reasons or factors that can
change a demand curve.
1. Number of consumers.
Eight Determinants of Demand:
1. Number of consumers
2. Income--Normal Goods
As people’s incomes go up demand for
normal goods increases. As people’s income
go down, demand for normal goods
decrease.
3. Income--Inferior Goods
As people’s incomes go up demand for
inferior goods decreases. As people’s income
go down, demand for inferior goods
increases.
Eight Determinants of Demand:
1. Number of consumers
2. Income--Normal Goods
3. Income--Inferior Goods
4. Preferences
Eight Determinants of Demand:
1. # of consumers
2. Income--Normal Goods
3. Income--Inferior Goods
4. Preferences
5. Price of related products: Substitutes
Eight Determinants of Demand:
1. # of consumers
2. Income--Normal Goods
3. Income--Inferior Goods
4. Preferences
5. Price of related products: Substitutes
6. Price of related products: Complements
Eight variables that shift Demand:
1. # of consumers
2. Income--Normal Goods
3. Income--Inferior Goods
4.
5.
6.
7.
8.
Preferences
Price of related products: Substitutes
Price of related products: Complements
Expected future of prices by consumers
Expected future of income by consumers
Supply Curve
Determinants of supply
Price
Quantity Supplied
2
3
4
5
\$3
\$4
\$5
\$6
P
\$6
\$5
\$4
\$3
S
2 3 4 5
Q
Price
Quantity Supplied
\$3
\$4
\$5
\$6
2
3
4
5
P
\$6
Quantity supplied \$5
is just a point on \$4
the curve.
\$3
S
2 3 4 5
Q
Price
Quantity Supplied
2
3
4
5
\$3
\$4
\$5
\$6
P
\$6
\$5
\$4
\$3
Supply is the
entire curve.
S
2 3 4 5
Q
Price
Quantity Supplied
2
3
4
5
\$3
\$4
\$5
\$6
There is a
Direct
_________
relationship
between P
and Q.
P
\$6
\$5
\$4
\$3
S
2 3 4 5
Q
Price
Quantity Supplied
\$3
\$4
\$5
\$6
2
3
4
5
P
\$6
Only one variable \$5
changes QS
\$4
and that is_____.
\$3
S
2 3 4 5
Q
Price
Quantity Supplied
2
3
4
5
\$3
\$4
\$5
\$6
PRICE DOES
NOT CHANGE
SUPPLY!!!!
P
\$6
\$5
\$4
\$3
S
2 3 4 5
Q
P
S
Definitions:
Q
Quantity supplied--it is the amount that will be
sold at a specific P.
Supply--it is a schedule of quantities of goods and
services that will be sold at various prices
at a specified time, all other things held constant.
Determinants of Supply

There are 5 determinants that can change a
supply curve.
Five determinants of Supply:
1. Number of suppliers
2. Costs
3. Physical Availability of Resources
4. Technology
5. Expected Future Prices by Consumer
What happens to the market for oranges when
there is a frost that hits Florida?
S1
P
S
Decrease in
the physical
availability
of resources.
P1
P
D
Q1 Q
Oranges
Q
What happens to the market for CD’s when
P
S
Decrease in
Preferences.
P
P1
D1
Q1
Q
CD’s
D
Q
music when the royalties paid to the song artist
go up? P
S1
S
Increase in
costs.
P1
P
D
Q1 Q
Q
The U.S. goes through a boom economy, what
happens to the market for steak?
P
S
Increase in
incomes—
Normal goods.
P1
P
D1
D
Q
Q1
Q
The price of milk doubles; what happens to
the market for cereal?
P
S
Price of
related
product—
complement.
P
P1
D1
Q1
Q
D
Q
U.S. automakers use robots to produce their
cars; what happens to the market for
foreign automobiles?
P
S
Price of
related
product—
substitute.
P
P1
D1
Q1
Q
D
Q
The price of airline tickets doubles, what
happens to the market for bus tickets?
P
S
P1
P
D1
D
Q
Q1
Q
Increase in
price of
related
product—
Substitute
Shifts in both Demand and
Supply Curves
P
S
S
Quantity
will definitely
increase.
P1
P1
P
D1
D
Q
Q1Q1 Q
Increase in demand
Increase in supply
Price is
Indeterminate
It will either
go up.
P
S
P1
S
Quantity
will definitely
increase.
D1
Price is
Indeterminate
P
P1
D
Q
Q1 Q1
Increase in demand
Increase in supply
It stayed the
same.
P
S
Quantity
S will definitely
increase.
P1
P
P1
D1
D
Q
Q1
Increase in demand
Increase in supply
Q1
Price is
Indeterminate
It went down.
P
S
P
D
Q
Q
What happens to the price and quantity if there
is an increase in demand and a decrease in supply?
Price definitely goes up; Quantity is indeterminate
P
S
P
D
Q
Q
What happens to the price and quantity if there
is a decrease in demand and an increase in supply?
Price definitely goes down; Quantity is indeterminate
P
S
P
D
Q
Q
What happens to the price and quantity if there
is a decrease in demand and an decrease in supply?
Price is indeterminate; Quantity will definitely decrease
Example 1
Gillette Shaving Company mails out millions of Fusion shaver handles to households for “free.”
Show what happens to the market for the Fusion attachable razor blades?
Determinant:
______________
Price:
___________
Quantity:
____________
Example 2
Salaries of airline pilots go up while the economy goes into a recession.
Show what will happen to the market for airline tickets?
Determinant:
______________
Price:
___________
Airline Tickets
Quantity:
____________
Example 3
New technology starts to be used in producing computer chips,
and at the same time, the government publishes a report that long-term
exposure to computers causes long-term damage to users’ eyes.
Determinant:
______________
Determinant:
____________
Price:
___________
Computers
Quantity:
____________
Surplus

What happens when we look at a price that it
is NOT the equilibrium price?
P
S
Surplus:
P
Qs &gt; Qd
P
D
Qd
Q
Qs
Q
Shortage
S
Shortage:
Qd &gt; Qs
P
P
D
Qs
Q
Qd
Q
```